June 1925

JUNE, 1925 BULLETIN 375

BRITISH STANDARD ACT AND REPORT OF COMMITTEE ON CURRENCY There is presented below the text of the bill (3) Where by any appropriation act passed after passed by the British Parliament ato facilitate the commencement of this act power is conferred on the return to a and for purposes the treasury to borrow money up to a specified amount, 1 any sums which may at the time of the passing of that connected therewith. ' Following the bill is act have been borrowed or guaranteed by the treasury the full text of the report of the committee of in pursuance of this section and are then outstanding experts on the currency and shall be treated as having been raised in exercise of the power conferred by the said appropriation act and the note issues presented on February 5 and made amount which may be borrowed under that act shall public on April 28. be reduced accordingly. 3. This act mav be cited as the gold standard act, GOLD STANDARD ACT, 1925 1925. 1. (1) Unless and until His Majesty by proclama- REPORT OF THE COMMITTEE ON THE CURRENCY tion otherwise directs— AND BANK OF ENGLAND NOTE ISSUES (a) The Bank of England, notwithstanding any- thing in any act, shall not be bound to pay any note of the bank (in this act referred to as "a bank note") TREASURY MINUTE DATED JUNE 10, 1924 in legal coin within the meaning of section 6 of the Bank of England act, 1833, and bank notes shall not The Chancellor of the Exchequer proposes to the cease to be legal tender by reason that the bank does board that the following committee should be ap- not continue to pay bank notes in such legal coin. pointed to consider whether the time has now come (b) Subsection (3) of section 1 of the currency and to amalgamate the Treasury note issue with the Bank bank notes act, 1914 (which provides that the holder of England note issue, and, if so, on what terms and of a currency note shall be entitled to obtain payment conditions the amalgamation should be carried out: for the note at its face value in gold coin), shall cease The Right Hon. Austen Chamberlain, M. P. (chair- to have effect. man); Sir John Bradbury, G. C. B.; Mr. Gaspard (c) Section 8 of the coinage act, 1870 (which entitles Farrer; Sir O. E. Niemeyer, K. C. B.; and Mr. A. C. any person bringing gold bullion to the mint to have it Pigou. assayed, coined, and delivered to him), shall, except as My lords concur. respects gold bullion brought to the mint by the Bank of England, cease to have effect. TEXT OF REPORT (2) So long as the preceding subsection remains in force the Bank of England shall be bound to sell to any May it please your lordships, person who makes a demand in that behalf at the head (1) By Treasury minute of June 10, 1924, we were office of the bank during the office hours of the bank, appointed a committee to consider whether the time and pays the purchase price in any legal tender, gold has now come to amalgamate, the Treasury note issue bullion at the price of £3 17s. lOJ^d. per ounce troy with the Bank of England note issue, and, if so, on of gold of the standard of fineness prescribed for gold what terms and conditions the amalgamation should coin by the coinage act, 1870, but only in the form of be carried out. bars containing approximately 400 ounces troy of fine (2) We have held 9 meetings and have heard 13 gold. witnesses, including the governor of the Bank of 2. (1) Any money required for the purpose of ex- England, Mr. McKenna, Sir Robert Home, Professor change operations in connection with the return to a Cannan, Sir George Paish, Mr. Keynes and repre- gold standard may be raised within two years after the sentatives of the clearing banks, the Association of passing of this act in such manner as the treasury British Chambers of Commerce, and the Federation think fit, and for that purpose they may create and of British Industries. issue, either within or without the United Kingdom (3) The greater part of our evidence was taken and either in British or in any other currency, such se- during the months of June, July, and September, curities bearing such rate of interest and subject to 1924, when the sterling dollar exchange was still at a such conditions as to repayment, redemption, or other- discount of 10 to 12 per cent, but we heard the governor wise as they think fit, and may guarantee in such man- of the Bank of England a second time on the 28th of ner and on such terms and conditions as they think January, 1925. proper the payment of interest and principal of any On accepting office as Secretary of State for Foreign loan which may be raised for such purpose as aforesaid: Affairs, Mr. Chamberlain ceased to act as a member Provided that any securities created or issued under of the committee. Sir John (now Lord) Bradbury this section shall be redeemed within two years of the took the chair at the remaining meetings. date of their issue, and no guarantee shall be given under this section so as to be in force after two years THE CUNLIFFE COMMITTEE'S RECOMMENDATION from the date upon which it is given. (2) The principal and interest of any money raised (4) The natural starting point of our inquiry was under this act, and any sums payable by the treasury in the recommendation of the committee on currency fulfilling any guarantee given under this act, together and foreign exchanges after the war (the Cunliffe with any expenses incurred by the treasury in connec- committee), that the currency note issue should be tion with, or with a view to the exercise of, their powers transferred to the Bank of England when it had been under this section shall be charged on the consolidated ascertained, from experience in a free gold export fund of the United Kingdom or the growing produce market, what fiduciary issue is compatible with the thereof. maintenance of a central gold reserve of £150,000,000.

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376 FEDERAL RESERVE BULLETIN JUNE, 1925

(5) These conditions have not yet been fulfilled, the internal purchasing power of the pound to its ex- and we have found it necessary to enter somewhat change parity, and restricted our foreign investments fully into the questions whether a return to the gold to our normal export surplus. standard on the basis of the pre-war sovereign is, in (14) Further, we were satisfied that the mere present circumstances, no less desirable than at the announcement that the power to prohibit the export time of the Cunliffe committee's report; and if so, of gold would not be continued beyond December 31, how and when the steps required to achieve it should 1925, would automatically and rapidly bring about be taken. the credit conditions necessary to effect these adjust- THE GOLD STANDARD ments, and that the effective gold standard could thus be restored without further danger or inconvenience (6) The alternatives are— than that which is inevitable in any period of credit (a) To return to the gold standard on the basis of restriction and falling prices. a devalued sovereign, i. e., the reestablishment of a (15) At that time the British and American price free gold market with a unit identical in name but of a levels appeared on the surface—though it is not safe to lesser gold content than the pre-war unit, and attempt to draw precise conclusions from a comparison (b) To attempt to find a basis for the currency unit of index figures compiled on different bases—to be other than gold. fairly well adjusted to the current rate of exchange; (7) The former need not, now that the current and it was, therefore, to be expected that a fall in exchange rates are already within a small percentage sterling prices of some 10 or 12 per cent, or a similar of the pre-war parity, be seriously considered. It rise in dollar prices, would have had to take place was never, in our opinion, a policy which the United before equilibrium could be secured with the exchanges Kingdom could have adopted. at the pre-war parity. (8) The latter, in the form of proposals for substi- (16) The problem as it then presented itself was tuting the price level of commodities in general for gold whether the undoubted advantages of an immediate as the regulating principle of the currency, has been return to parity were a sufficient compensation for the fully and carefully explained in evidence before us. We inconveniences—temporary though possibly severe need not here set out the arguments by which it is while they lasted—of the measure of " deflation" supported, which have been published and are now necessary to bring about the adjustment, or whether well known. "We need only say that, as a practical it would not be more prudent to pursue, at least for a present-day policy for this country, there is, in our few months longer, a waiting policy in the hope that opinion, no alternative comparable with a return to the the disparity would disappear through a rise in Ameri- former gold parity of the sovereign. In this conclu- can prices (of the probability of which there appeared sion we are supported by the overwhelming majority to be indications). of opinion, both financial and industrial, represented (17) Our provisional conclusion was that the return in evidence before us. to parity and resumption of the free gold market, (9) Starting from this fundamental position, we though it ought not to be much longer deferred, could propose to confine ourselves to answering the questions not be regarded as a matter of such extreme urgency when and how this restoration is to be brought about. as to justify a credit policy calculated to bring down (10) When we first began to consider our report in domestic prices if the same practical result could September last, the ruling rates of exchange on New reasonably be expected to be attained within a very York were still 10 to 12 per cent below gold parity, few months by a policy designed merely to prevent and there was some anxiety whether the normal autumn them from rising concurrently with a rise elsewhere. pressure would not result in a renewed depreciation of (18) The favorable course since September of the the pound, and whether the limitation on the amount dollar exchange (which now stands only 1^ per cent of the fiduciary issue of currency notes prescribed by below gold parity) and the fact that the restrictions on the Treasury minute of December 15, 1919, could be the fiduciary issue of currency notes have been main- maintained over Christmas without giving rise to con- tained without inconvenience have, however, altered ditions necessitating a sharp rise of money rates. the situation. Indeed, if British domestic prices had (11) We entertained no doubt, however, even at already adjusted themselves to the improved exchange that time, of the ability of Great Britain, notwith- value of sterling, the problem would have been solved standing the fact that her international financial situa- and we are satisfied that the free export of gold could tion is in some respects less satisfactory than it was have been resumed forthwith without danger either before the war, to restore and maintain the gold stand- of appreciable depletion of our existing gold reserves ard at the pre-war parity, at any time it might be or of making recourse necessary to any special meas- thought prudent to do so. ures in restriction of credit. (12) In spite of the special influences which have, (19) The discrepancy between British and Ameri- during the last few years, exercised an adverse influence can gold prices which existed in September has not, (of which the principal are industrial stagnation and however, disappeared, though it has been reduced. the disturbance of international trade resulting from We must still be prepared to face a fall in the final post-war conditions, and the fact the we are paying price level here of a significant, though not very large, interest and sinking fund on our war debt to America amount, unless it should happen that a corresponding without as yet receiving an adequate counterpart from rise takes place in America, if the rate of exchange is our continental debtors), our existing volume of to be restored to and held at the pre-war parity. exports, visible and invisible, together with the income (20) In present conditions, however, this argument we derive from foreign investments is still undoubtedly against immediate action has not, in our opinion, great sufficient to meet our foreign debts and pay for our weight. For the adjustment of price levels required necessary imports, and even to supply a moderate to restore and maintain pre-war parity needs to be balance for new foreign investment. only some l}4 per cent larger than that required to (13) In these circumstances a free gold market could hold the exchange at its present rate. If the adjust- readily be established and maintained at the pre-war ment of price levels necessary to this end is long de- parity, provided that by control of credit we adjusted ferred, the exchange will inevitably fall back to the

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JUNE, 1925 FEDERAL RESERVE BUILLETTN 377

rate justified by the comparative price levels—or be- (27) In so far as this confidence in the future of low it, since the psychological causes which have oper- sterling has allowed the resumption of those normal rated to force it up will tend to act in the other direc- operations between New York and London which had * tion—and a period of fluctuating values is likely to been interrupted by political uncertainty and distrust ensue. To allow the exchange to fall back now with in the preceding 12 months, no reactionary conse- the certainty of having later on to raise it again would quences are to be feared. be a short-sighted policy, injurious to trade and in- (28) There has, however, undoubtedly been a con- dustry. But, if this view is accepted and we are pre- siderable element of speculation in connection with pared to face any price adjustment which may be that movement, the extent of which can not be exactly necessary to maintain the present exchange rate, there determined. To this unknown extent there may be a is nothing to be said for refusing to accept the very tendency, when parity has been reached, for realiza- small (lj

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378 FEDERAL EESEEVE BULLETTX JUXE. i925

inevitable under the present regime—of excessive lutely and proportionally than if there were no gold in British lending to foreign countries will be reduced. circulation. (34) With a free gold market, any tendency to lend (42) Any considerable flow of gold into domestic cir- abroad more than we can afford leads to a drain of gold, culation would thus necessitate imports of the metal which, unless redressed by the sale of existing foreign which would place an unnecessary burden on our foreign investments, reacts on the. general credit situation in exchanges in a very difficult period. London in such a way as to put a stop to new foreign (43) We are of opinion that the use of gold for domes- borrowing. tic circulation is a luxury which can well be dispensed (35) Under existing conditions the result of excessive with, and which we are in fact, at any rate during the lending to foreign countries instead of giving an imme- next few years, not likely to be able to afford. diate danger signal through its effect on the gold reserves (44) The payment of notes in gold coin upon demand is more obscurely reflected in the general disturbance is not in itself essential to the maintenance of the gold of the exchanges. standard under modern conditions. An obligation (36) We are of the opinion that unless a free gold upon the bank of issue to buy and sell gold at a fixed market is restored the danger of such overlencling on price is all that is necessary, and if in fact specie pay- foreign account in the near future will be considerable ments had been suspended during the war, we should and a situation may easily develop in which the pressure not have recommended their resumption. on our foreign exchanges, resulting from oyerlending to (45) We should be glad, though mainly for historical foreign countries, will necessitate a restriction of general and sentimental reasons, to make no formal change in credit. the existing position under which gold coin is still legally obtainable for notes, and we think that the THE AMALGAMATION OF THE NOTE ISSUES national habit of using paper currency, now firmly established, may suffice to prevent the absorption of (37) We return now to the recommendation of the any appreciable quantities of gold into domestic circu- Cunliffe committee with respect to the amalgamation lation, provided that the joint stock banks are able to of the note issues. We have to consider whether the assist such a policy by undertaking to abstain from assumption by the Bank of England of the currency asking for gold coin in exchange for notes either for note issue must await the experience of the problem of themselves or for their customers, and from holding maintaining a minimum gold reserve, whether of gold themselves, and in general by actively discouraging £150,000,000, as recommended by the Cunliffe com- the use of gold among their customers. mittee, or of some other figure. (46) If, however, there is any doubt whether this will (38) It is clear that throughout their report the Cun- be effective, then we are decidedly of opinion that steps liffe committee contemplated a much earlier removal must be taken forthwith by legislative enactment to of the prohibition of gold exports than has actually been prevent the internal circulation of gold coin, until such deemed expedient, and suggestions have been made to time as the gold standard has been firmly reestablished us that the amalgamation of the issues should precede for the purposes of international transactions. instead of following the restoration of the free gold (47) We think that, in any circumstances, all Bank of market* with a view to indicating that the policy of the England notes, including the £1 and 10s. notes ulti- Government is to restore parity and for the sake of the mately to be substituted for currency notes, should in effect of such an indication upon the foreign exchanges. future be payable in coin only at the head office of the (39) If our recommendation in regard to the non- bank, and not at the branch offices. renewal of the prohibition of gold exports is adopted (48) In any case the coinage of standard half- the arguments for altering the sequence of events pro- sovereigns should not be resumed. posed by the Cunliffe committee cease to operate, and (49) Subject to this observation, we recommend that the precise date of amalgamation loses most of its the policy with regard "to the transfer of the currency importance. We associate ourselves with the decided note issue to the Bank of England should remain as preference expressed by the Cunliffe committee for the recommended by the Cunliffe committee. We should principle of a fixed fiduciary issue, and it is as true mention that the machinery of issue by the Bank of to-day as five years ago that the permanent fiduciary England of £1 and 10s. Bank of England notes can issue can not be fixed, except with reference to the not be improvised at short notice. We understand that actual conditions of a free gold market. It is hardly if the bank is to print its own notes at least a year will more feasible to legislate for a progressive reduction to be required to set up the necessary organization, and the final figure by definite stages, at any of which the this must be borne in mind in order that sufficient notice process may be subjected to unforeseen disturbances. may be given to the bank. As soon as parity is re- The Treasury can not escape from the responsibility stored we recommend that the bank be authorized to for the existing issue; we doubt whether the bank begin the provision of this machinery. Legislation would accept it until the time when effective control would also be required to enable the bank to issue notes can also be given to them. below £5, and to make those notes legal tender. (40) In this connection we think it necessary to (50) We anticipate that if the free gold market is observe that the ultimate dimensions both of the cen- restored at the end of 1925, the experience necessary tral gold reserve and of the fiduciary issue must be to to enable the amount of the fiduciary issue to be defi- some extent dependent on whether, after the restora- nitely fixed will have been obtained by the end of 1927. tion of the gold standard, gold is or is not largely used The transfer of the issue could then take place early in for internal circulation. 1928. But it may well be possible to accelerate these (41) The figure of £150,000,000 suggested for the dates in the light of experience. gold reserve by the Cunliffe committee is based on the assumption that it will not be so used. If it were, a BRADBURY. lower figure would suffice, regard being had to the value GASPARD FARRER. of gold in circulation as an emergency reserve, as was O. E. NlEMEYER. demonstrated in 1914. On the other hand, the total A. C. PIGOU. note circulation would be pro tanto reduced and the N. E. YOUNG, Secretary. fiduciary portion would have to be smaller, both abso- FEBRUARY 5, 1925.

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